BlackRock Capital Investment Corp (BKCC) 2017 Q4 法說會逐字稿

Good morning. My name is John, and I will be your conference facilitator today for the BlackRock Capital Investment Corporation Fourth Quarter 2017 Earnings Call. Hosting the call will be Chief Executive Officer, Michael J. Zugay; Interim Chief Financial Officer and Treasurer, Michael Pungello; General Counsel and Corporate Secretary of the company, Laurence D. Paredes; Marshall Merriman, Head of Portfolio Management for BlackRock's U.S. Private Capital Group; and Nik Singhal, Investor Relations and Business Strategy. (Operator Instructions).

Mr. Paredes, you may begin the conference call.

Good morning, and welcome to BlackRock Capital Investment Corporation's fourth quarter 2017 earnings conference call.

For we begin our remarks today, I would like to point out that certain comments made during the course of this conference call and within corresponding documents contain forward-looking statements subject to risks and uncertainties. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may and similar expressions. We call to your attention the fact that BlackRock Capital Investment Corporation's actual results may differ from these statements.

As you know, BlackRock Capital Investment Corporation has filed with the SEC reports, which list some of the factors, which may cause BlackRock Capital Investment Corporation's results to differ materially from these statements.

BlackRock Capital Investment Corporation assumes no duty to and does not undertake to update any forward-looking statements.

Additionally, certain information discussed and presented may have been derived from third-party sources and has not been independently verified. Accordingly, BlackRock Capital Investment Corporation makes no representation or warranty with respect to such information.

Please note, we've posted to our website an investor presentation that complements this call. Shortly, Mike will highlight some of the information contained in the presentation. Presentation can be accessed by going to our website at www.blackrockbkcc.com and clicking the March 2018 Investor Presentation link in the Presentations section of the Investors page.

Thank you. I would now like to turn the call over to Mike Zugay, who will provide an overview of the business and fourth quarter highlights.

Thank you, Larry. Good morning, and thank you for joining our fourth quarter earnings call. I would like to start by giving an update on the quarter, and year-end business and financial highlights, then move to the current market environment and our investment activity during the fourth quarter. Lastly, I will discuss the underlying portfolio performance before turning it over to Mike Pungello, our interim CFO, to discuss our financial results in a bit more detail.

For the fourth quarter, net investment income was $0.20 per share. Based on the $0.18 per share distribution declared by our Board of Directors, there was approximately 110% distribution coverage for the quarter. For the full year 2017, relative to distributions declared of $0.72 per share, our NII distribution coverage was 104%. Net asset value per share decreased from $7.96 per share last quarter to $7.83 per share as of December 31, or a 1.6% quarter-over-quarter decrease. The decline was in large part due to 2 legacy positions, one of which has been partially exited post quarter-end. We will cover this in more detail in the portfolio overview section.

Our leverage profile remains relatively low at 0.32x, and we have ample liquidity of over $365 million to support new investment activity. Under our existing share repurchase program, we were actively buying shares of our common stock during the quarter. In the fourth quarter, we repurchased nearly 225,000 shares, at an average price of approximately $6.37.

Quickly turning to the liabilities of the company. In February 2018, we repaid the remaining $55 million of our 5.5% unsecured convertible notes at their maturity, with proceeds under our revolver and cash on hand. This entire tranche of unsecured convertible debt is no longer outstanding. From the work we have done with regard to liability management over the course of 2017, we have reduced the interest rate of our fixed rate debt, and extended the maturity profile to 2022. Pro forma for the 5.5% notes redemption are fixed rate debt investments with a par value of $133 million are closely matched with our fixed rate liabilities of $144 million.

Additionally, 73% of our debt investments have LIBOR-based coupons, putting us in a favorable position to benefit from a rising interest rate environment.

Now turning to the market and our investment strategy. During the quarter, we have passed on many potential opportunities due to credit quality, structure and/or pricing, all of which reduced the relative attractiveness of such opportunities. As has been the case for the last several quarters, current market conditions for middle-market leverage loans can be generally categorized as being highly competitive with an abundance of junior capital available, which has led to spread compression, especially for second lien loans. We are seeing higher total leverage levels and weaker structures, especially more covenant-light loans in the upper end of the middle market greater than $50 million of EBITDA.

Given this backdrop, we continue to be focused on borrowers with strong underlying credit profiles with a bias toward first lien senior secured loans. As discussed on prior calls, our 3 core channels for deployment continue to be investments and high-quality junior capital opportunities; our portfolio company investment in Gordon Brothers Finance Company; and our portfolio company investment in BCIC Senior Loan Partners, our first lien joint venture.

With regard to BCIC Senior Loan Partners, and Gordan Brothers Finance Company, both entities have underlying investments in diversified pools of primarily first lien loans that generate attractive risk-adjusted returns, yielding 11% or higher on our investments in these 2 entities. We are exploring opportunities with our JV partner to possibly expand Senior Loan Partners capacity. We anticipate making incremental increases to Senior Loan Partners over the course of the year as the existing commitments become fully invested.

This program is an important part of our business strategy and the underlying investment portfolio is performing very well. From March 6, 2015, when BlackRock assumed responsibility for managing the investment activities of the company to the end of the fourth quarter, our team has deployed over $650 million into new investments. As of December 31, approximately 52% of our current investment portfolio, by fair market value, is represented by investments deployed by BlackRock.

Turning to our investment activity during the quarter. We made new investments of approximately $63 million, which was more than offset by repayments and other exits, totaling approximately $124 million for a net $61 million decrease in our portfolio due to investment activity.

Our deployments and repayments are detailed in our fourth quarter earnings release. We invested in 3 new portfolio companies and [were] repaid out of 5 existing companies. Due to the repayment activity in the quarter, we did experienced an elevated amount of one-time fee income, primarily related to prepayment premiums on portfolio company exits.

We generated strong IRRs on these exited investments and it is our goal to replace the above average portfolio runoff with new investments. Our team benefits from the size and scale of the broader BlackRock platform and we are seeing a strong amount of deal flow as we begin 2018.

With the repayment and deployment activity this quarter, we now have 30 companies in our portfolio at a fair market value of approximately $758 million. The weighted-average yield of income-producing securities at fair market value was 10.8% as of December 31, which is unchanged from last quarter.

As of December 31, we had 2 investments on nonaccrual status, SVP and MBS Group Holdings, which represented 4% of our total debt investments at fair market value. During the quarter, we recapitalized MBS Group Holdings in connection with a change of control transaction. As part of the recapitalization, we provided new debt and a modest portion of the equity to the new MBS entity. At the end of the quarter, proceeds of these investments were held in escrow, pending completion of the transactions.

Subsequent to the end of the quarter, a part of the proceeds were applied to partially exit the Legacy MBS Group Holdings debt, which was on nonaccrual. We are now partnered with a private equity sponsor that has industry expertise to improve the business and its operations, with the assistance from their operating partners.

Regarding the other nonaccrual, SVP Worldwide, as many of you know from our previous calls, we have been working with stakeholders involved in SVP to rightsize the balance sheet of the company and to provide liquidity in order to better position the company to execute on its business plan.

We believe we are getting closer to resolution as we continue to work constructively with the first lien debt holders, other members of our mezzanine tranche and the equity sponsor. However, there can be no certainty of outcome at this point. It should be noted that during the fourth quarter, Advanced Lighting Technologies was restructured and recapitalized and was moved off nonaccrual status.

We continue to have volatility in our fair market valuations due to certain legacy investments, which primarily drove the negative $14.4 million change in fair market value versus last quarter. SVP Worldwide and MBS Group Holdings represented the majority of the decreases in valuations this quarter in dollar terms.

The negative movements this quarter were only partially offset by the increases in valuations, of which Vertellus and Red Apple were 2 of the positive movers. Given the equity and equity-like nature of these investments, they are highly sensitive to movements in EBITDA. And these businesses experience varying degrees of EBITDA movement that contributed to the increase in valuations.

With that, I would like to turn the call over to Mike Pungello, for some additional details regarding our financial results.

Thank you, Mike. I will take a few minutes to review additional financial and portfolio information for the fourth quarter of 2017.

GAAP net investment income, NII, was $14.5 million, or $0.20 per share and $55.1 million, or $0.75 per share, respectively, for the 3 months and year ended December 31, 2017. Total investment income was $24.4 million for the quarter as compared to $22.8 million in the preceding quarter, and $28 million during the prior year quarter. Fee income earned on capital structuring, prepayments, commitments and administration during the current quarter totaled $2.9 million as compared to $0.2 million earned during preceding quarter, and $2.6 million earned during the prior year quarter.

During the fourth quarter 2017, we repurchased 224,889 of our shares for $1.4 million at an average price of $6.37 per share, including brokerage commission. As of December 31, 2017, 2 investments were in nonaccrual status, which were 4% of our total debt investments at fair market value and 15.5% at amortized cost, compared with 2.7% at fair market value and 8.9% at amortized cost last quarter, respectively.

Our average internal investment rating at fair market value at December 31, 2017, was 1.35 as compared to 1.3 as of September 30, 2017.

Net unrealized depreciation on investments increased $10.3 million during the current quarter, bringing total balance sheet net unrealized depreciation on investments to $72.7 million.

During the quarter, gross unrealized depreciation on investments of $4.2 million was offset by $18.6 million of gross unrealized depreciation on investments, primarily driven by legacy positions for a net $14.4 million of depreciation due to portfolio valuations.

As previously disclosed, we announced a waiver of incentive management fees based on income from March 7, 2017 to December 31, 2018.

For the 3 months ended December 31, 2017, $2.9 million of incentive management fees based on income were waived pursuant to this announcement.

The cumulative amount of such incentive management fees waived since March 7, 2017, is $8 million. During the quarter, there was no accrual for incentive management fees based on gains.

At December 31, 2017, we had total liquidity of approximately $365.6 million, consisting of $29 million in cash and cash equivalents, and $336.6 million of availability under our credit facility based upon our December 31, 2017 borrowing base calculations. Our available debt capacity for portfolio company investments is approximately $354.2 million under our asset coverage requirements.

With that, I would like to turn the call back to Mike.

Thank you, Mike. We thank you for your participation in today's call. This concludes our prepared remarks.

With that, operator, we would like to open the call to questions.

(Operator Instructions) We'll take our first question from Jonathan Bock with Wells Fargo Securities.

Just starting first with maybe a few names. So looking at Advanced Lighting, I think there was another BDC that actually increased exposure on the exchange to increase their overall allocation, yet you took the opportunity to reduce. So I'm kind of wondering how you received kind of the no-cost equity stake.

Jonathan, it's Mike Zugay here. So we also participated in the increase in the capital being deployed to Advanced Lighting. So I think you're referring to probably one of the other large holders that holds it in the BDC. We participated with our ratable piece with them. The equity that we got -- and you might be mixing MBS with Advanced Lighting, but the equity or the securities that we had converted into equity. So our existing position converted into equity into the company and some second lien securities as well as we made a new investment that was roughly about $5 million in the first lien, and that was our pro rata share into the -- capital infusion into the company. So we also did participate in that as well.

Got it. So maybe a modeling question. Just looking at where leverage is today, one would expect more origination and allocation to the BDC balance sheet with respect to the SLF. Understand the SLF, it's easier, it's more liquid, it's easier to grow. Would you say that limited growth on BDC balance sheet is tailored to: a, just a lack of available opportunity; or b, I would just say, kind of a platform, a point in time as you're building out and trying to reorient a platform, in order to do more directly originated transactions. Like, one point is they do exist, they're out there, folks are doing them but they are much harder to find now as opposed to (inaudible) have been in the past. So a little comment on overall balance sheet growth and let's just leave the SLF aside for a moment.

Yes. Look, I think that to address your kind of point a and b, we are definitely not seeing a lack of opportunity. I think -- I would categorize it as a lack of opportunity for what we see to be good risk-adjusted returns in the marketplace. So we're being highly selective on what comes through our committee and what eventually makes its way into the portfolio. It is definitely not a lack of looks in the marketplace. So we are in -- we are seeing opportunities. And I would say that the leverage is more of a point in time. And looking at the balance sheet, we had some roll-off this quarter, but you have to look at it on a longer period time -- a longer time horizon. So as you know, the targets for leverage are around the -- 0.65 or higher. And I think you can anticipate us kind of getting to that, if we see good opportunities in the marketplace through the course of 2018, but that -- lower leverage (inaudible) point in time.

Got it, and I appreciate that. So if there isn't a problem with the origination teams, point in time, you've got -- just risk-adjusted returns aren't that attractive? I think there's an excellent risk-adjusted return purchase available in your stock, and so can you talk about why you wouldn't want to over accelerate that? Just given that right now, the market's not giving you an opportunity on the asset side but it certainly is giving you a fantastic opportunity on the share repurchase side. And with leverage low, you can do it.

Absolutely. Look, we bought 225,000 shares, roughly -- rough numbers in the fourth quarter. We do -- the board of the BDC has in place a, I'll just call it generically, an auto share repurchase plan that is set at -- by the board. So provided that, the stock is trading in bands where we're able to buy, we will buy -- we'll be buying shares. So -- but that's a predetermined plan set by the board. But I would agree with you that our stock provides us a attractive investment opportunity, if you will. If you look across at more of like a capital allocation based on investments, we could make a good investment in our stock. And that's something that is considered by the board. It's something we did pretty actively in the fourth quarter.

Got it. I think -- actually, I mean, I wanted just to -- as it relates to size, it's important. So would it be fair to say that while it is the board's decision, you would, in fact, choose to recommend more -- emphasize share repurchases today, perhaps over and/or on par with making new investments?

Look, it's a balancing act across all the different opportunity sets that you see. We do have really good opportunities to invest in and I know you said to leave SLF...

But you just said, you didn't. I got it, you're talking about the SLF.

Yes. So as you think about that and as you think about the Gordon Brothers portfolio company that we have, those 2 investments, in particular, have very good -- greater than 11% opportunities for us to deploy capital. So it's a balancing act between share repurchases -- potential share repurchases and deploying into those -- into really the 3 core pillars. But as you could see in the fourth quarter, we were active. But -- and we also have 2.3 million shares that have been approved by the board that are still outstanding for a period of time to buy back additional shares. So we agree with you. It appears to be a good opportunity, but it's balancing that with the 2 primary pillars of our deployment strategy that have equal or better investment opportunities from a return standpoint as well.

(Operator Instructions) We'll take our next question from Melissa Wedel with JPMorgan.

Melissa on for Rick today. Quick question on the fee income, which was elevated in 4Q. How are you thinking about the potential for additional fee income, even if not at the same model as you had in 4Q, but perhaps elevated, kind of going into 2018?

Melissa, it's Mike Zugay here. It's very hard to predict fee income. There's different components of fee income. There is prepayment premiums on existing holdings. There's potential fee income on new investments that -- over the course of the year or so. It's just very hard to forecast the fee income as in any one quarter or across the course of an entire year. There are elements that you -- as you have repayments in the portfolio, we have the opportunity to achieve fee income on those. It's just very hard to predict. So I wish I had a crystal ball for you for you to -- for me to see into because it would help better forecast on our side. But unfortunately, those are just very hard to predict in any one quarter or over the course of even a longer period of time.

Fair enough. Perhaps, we can talk more broadly then. As you are -- I think you said that you're finding opportunities that you want to invest in on the senior loan side. Given the borrower-friendly environment right now, are you able to structure fees into those deals right now? Are you emphasizing prepayment income at all?

So when you say the senior loan deals, are you referring to our -- the JV portfolio, Senior Loan Partners? Or are you more broadly referring to senior loan deals that are on balance sheet for the BDC?

Both.

Both. So for senior loan deals on the balance sheet of the BDC, there really is a market for what the fees are. Those fees, at any given market condition can range from 0.5 to 3 points. We're currently in more of a 1 point market for first lien debt. For OID or fee income, it's generally specified by the documents that we're signing up to. But it's kind of a 1 point environment right now for first lien loans. On Senior Loan Partners, where we're buying into effectively deals with -- that have more of a clubbed up investor group, those would ebb and flow as well but are generally in the same band around 1 point in today's market.

(Operator Instructions) And it appears there are no further questions at this time, I'd like to turn the conference back over to our speakers for any additional or closing remarks.

Thanks, everybody. Thanks for the questions, and we'll be talking soon in the next quarterly call. Thank you.

And that concludes today's call. Thank you for your participation. You may now disconnect.